Robert D. Arnott, First Quadrant's president and chief investment officer, and other executives there are trying to put together a deal to buy the firm from Talegen Corp., the Xerox unit that owns First Quadrant, Mr. Arnott said. First Quadrant, based in Pasadena, Calif., manages $7.85 billion for tax-exempt clients in market neutral, domestic and global tactical asset allocation, equities and other strategies.
"Management is certainly a possible buyer," Mr. Arnott said.
But others may bid for the company, too.
Bruce McEver, president, Berkshire Capital, New York, which specializes in advising on money management acquisitions, said: "We have a client that is looking at that." He declined to elaborate further.
Another industry adviser suggested First Quadrant could sell for $100 million to $150 million.
Based on its managing about $15 billion total, including its business from non-tax-exempt clientele, the adviser suggested that price assumed a 25 basis-point average management fee, bringing in annual revenue of $40 million.
Christopher Spofford, associate, Putnam Lovell & Thornton Inc., New York, said he hasn't followed First Quadrant closely, but the price for institutional money managers in general has been increasing in the market. That suggests Xerox's timing of the sale might be good now.
"I think the pricing on average is 5% to 10% better than it was two years ago," Mr. Spofford said.
Companies looking for acquisitions in the money management area have become turned off by the increasingly high prices mutual fund companies are commanding in the market, he said.
"Until recently, they (institutional managers) were trading at a discount to mutual fund companies," he said. But potential acquirers are looking more at institutional managers because "they are perceived as a less expensive way to" acquire money management companies.
Institutional money managers have most of the attributes, and some additional advantages, potential acquirers see in mutual fund companies, he added. Among them are economies of scale, very little capital needs, very high margins and recurring revenues.
One East Coast money manager suggested Xerox is seeking a "rich" price for First Quadrant, which could preclude the Arnott-led management group from financing a buy-out.
But the manager said Mr. Arnott and his crew could have some leverage, depending on how tightly their employment contracts tie them to First Quadrant, whether they could bolt and form a competitive firm or whether they have non-compete clauses.
Mr. Arnott said the sale is part of Xerox's unwinding of its financial services businesses.
Xerox put all of Talegen's other companies up for sale, too, said a spokeswoman at Talegen. Talegen's other units are mainly insurance-related companies, including Crum & Foster.
First Quadrant's clients include The Common Fund, Westport, Conn.; the Stanford University endowment, Menlo Park, Calif.; and the pension funds of BellSouth Corp., Atlanta; Asea Brown Boveri Inc., Stamford, Conn.; E.I. du Pont de Nemours & Co., Wilmington, Del.; and Elf Aquitaine Inc., New York.
First Quadrant ranked high among competitors in its net gain of new business in the last year (see story on page 20).
For the year ended Dec. 1, First Quadrant gained a net $1.497 billion in assets from both new and existing clients. That placed First Quadrant second in the net dollar gain of assets among managers running $1 billion to $10 billion.
In international and global equities, it ranked eighth among competing managers. First Quadrant gained $650 million.